dividend policy and its effect on market pricing

7/23/2019 Dividend Policy and Its Effect on Market Pricing

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Dividend Policy And Its Effect On Market Pricing"

byRohit Mehrotra *

The term "dividend" usually refers to a cash distribution of earnings. It isnothing but a part of profit (earning per share) which company decides toshare with its shareholders in form of cash on a regular basis, usuallyannually (sometimes semiannually). My study is all about the DIID!D#and its effect on the price fluctuations of the stoc$, i.e. how individualinvestor perceives dividends and how corporate world perceive theirpayouts. The controversy is that there are two school of thoughts withrespect of Dividends, one shows that dividends has no effect on mar$etpricing and other e%plains that how dividends positively influence the mar$etpricing of particular stoc$.

In &.#, earnings are doubled ta%ed i.e. firstly company pays the corporateta% on its earnings and secondly when the same amount is distributedamong the members it is ta%ed as their personal income. The rate of ta% in&.# on capital gain is less than income from dividends. Thus to avoid this

double ta%ation, generally investor are reluctant towards dividends and holdthe shares for long term prospective. 'ut what if the dividends are notta%able in the hand of investor and capital gains is ta%able at higher ratesthan that of dividends, as in case of India.

Ta$ing these views, in Indian scenario, I have started this proect, and triedto e%plore the payout mechanism and tried to scrutinie the conse*uence onstoc$ pricing with respect to the dividends paid by the companies.

+hy companies paying dividends is still a controversy. In Indian scenario ifwe ta$e some top traded - companies in 'ombay #toc$ !%change, there ishardly any company which is not paying dividends, moreover a thoroughstudy shows that even those companies which were ma$ing losses, also

paying some nominal dividends, using their prior reserves (subect to Theompanies (Transfer to reserves) /ules 0123). 4ere are some illustrationsthat represent the dividend policy of selected companies and its effect on itsstoc$ pricing in stoc$ mar$et.

+ipro ltd is one of the renowned IT company in India but still if we comparethe stoc$ price of +ipro and Infosys we find that +ipro is lagging behindowing to conservative dividend policy (5 67 continuously) unli$e asInfosys Technologies ltd, having an e%cellent payout (continuous growth individends).

The mar$et ris$ of any security depends on its 'eta (b), which shows therelation ship between the #ense% /eturns and #ecurity returns and measure

the relative ris$ associated with the security with respect to mar$et. 4igherthe beta, greater the ris$ associated with the security. Theoretically if the'eta of security is less than one, the security will be affected lesser thanproportion with mar$et #ense%.

ompanies li$e ovartis, IIT, #atyam omp, 8la%o, 9:8 4ealth are,+ipro, Infosys, etc representing ;37 of the sample sie, performed as perthe mar$et (#ense%) movement.


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negative sentiments i.e. &.# #lowdown, Tetan 9are$h#cam, 8T' and &TI debacle and now &TI?s failure, these stoc$s price alsocame down drastically.

ompanies li$e 4==, IT, /anba%y, Dr./eddy?s =ab, /eliance Ind. !tcrepresenting 6@7 of sample sie, performed e%traordinarily well, even after

all the debacle in #ense% ('#!). These are the stoc$s that are continuouslypaying handsome dividends and showing positive trend in the pricemovement and had never e%perienced any significant downfall in past @years. It is the e%cellent dividend payout record of these companies owing towhich these companies are still showing positive trend in the pricefluctuation even after the shambles in #ense% in recent past.

#tudy of companies revealed that about 6@7 companies in sample sie,consisting '#!#, =:T,


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"Beware Cororate! Investors do need Dividends and their Continos #rowth"

Monetary Policy

The /eserve 'an$ of India will announce its Monetary and redit 9olicy for the first half of the financial year 6--;0- on


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#ince 1221, as the economy has recovered and sector reforms increased, the // has fallen from 1 per cent in March1221 to .3 per cent in ovember 6--6. The #=/ has fallen from ;A. per cent to 6 per cent over the past decade.

I&act of CRR ct on interest rates

< cut in // re*uires 'an$s to $eep lesser portion of deposits with ban$s and thus more li*uidity to them to lendE investin gilts. Thus yield on 8overnment securities comes down thus aiding softer interest rates.

Effect of Monetary Policy on E+orters

/'I announces !%port refinance rate, or the rate at which the /'I will lend to ban$s, which have advanced pre0shipmentcredit to e%porters.

< lowering of the !%port /efinance rate would mean lower borrowing costs for the e%porter.

Relation $etween Money sly! wages! E&loy&ent and Ott

/'I tries to maintain money supply at such levels that economy operates at its full potential while minimiing theinflationary impact. If economy is operating at its full potential at its ma%imum possible level of employment, an increase inmoney supply will cause a rise in inflation. If economy does not operate at full potential, inflation can still be caused byother factors li$e supply situations (C9! cartel increasing prices of Cil). If inf lation is high, traditionally it leads to

increase in employment as real wages decrease. =ower inflation, similarly should lead to lower employment as real wagesincrease. Moreover, 8D9 growth rate might suffer as people due to lower fears of future price increases might postponeconsumption. 'ut on the opposite higher inflation adversely affect e%ports as our goods become price incompetitive in theinternational mar$ets.

Reglating Money )ly $y RBI

/'I uses 9rivate placement of 8overnment Debt, Cpen mar$et operations and // cut to regulate money supply in themar$et.

&nder Cpen mar$et Cperations, /'I buys or sells 8overnment 'onds in the secondary mar$et. It sells bonds to absorbli*uidity from the mar$et if interest rates are falling sharply.

< // cut re*uires the ban$s to $eep lesser money with the /'I and releases more funds for the ban$s to lendE invest in8overnment securities. This results in increase in money supply.

9rivate placement of bonds by the 8overnment with /'I allows the 8overnment to borrow at lower interest rate, whichotherwise 8overnment would have issued at higher interest rate from the mar$et. 9rivate placement increases moneysupply, as 8overnment gets money straight from /'I to spend.

E+ectations fro& the ,orthco&ing Monetary Policy-

Bank Rate-


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Reo Rate-The repo rate was reduced thrice last year and is presently at 7. This should further be reduced by 6 basispoints to .37. The mar$ets might e%pect - basis points cut, but the /'I is unli$ely to reduce it by this magnitude.

CRR-ash /eserve /atio, which at present stands at .37, is e%pected to be reduced by - basis points to .67, forthe following reasonsF

/'I plans to reduce // to the statutory minimum level of ;7 in a phased manner.

This will provide li*uidity support to the tune of around /s. @-- crores in the year of fresh borrowing program

of the 8overnment. If Bood credit, which in the current year showed an absolute decline, rises, then 'an$smight get into some li*uidity pressure due to healthy non0food credit offta$e coupled with lesser increase inaggregate deposits, which might be a result of rapid reductions in deposit rates over the last two years.

)o&e Monetary Policy ter&s-

Bank Rate

'an$ /ate is the rate at which #cheduled commercial ban$s borrow from the /'I. It is a signaling rate for ban$s todetermine their lending and deposit rates. 'an$ rate directly affects the 'an$?s borrowing costs from /'I and anydecrease in 'an$ rate spur ban$s to reduce their lending and deposit rates. < reduction also indicates to ban$s that /'I isfollowing a softer interest rate policy.

Cash Reserve Ratio


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In times of inflat ion, /'I sells securities to mop up the e%cess money in the mar$et. #imilarly, to increase the supply ofmoney, /'I purchases securities.

"E2A 3 De&ystified"

0 by Manish Daga G

Introdction

The aim of any organiation is to ma%imie the wealth of the shareholder, who own the organiation and e%pect goodlong0term yield on their investment. This goal has often been ignored or at least misinterpreted. !arnings per share and

/eturn on investment are used as the most important performance measures, although they do not theoretically correlatewith the shareholder value creation very well. #tern #tewart : o. pioneered the development of !conomic alue


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value added tells us how much has been added or reduced from the shareholder?s investment. If a company?s rate ofreturn e%ceeds its cost of capital, the company will have a positive M< and will sell on the stoc$ mar$ets with premiumcompared to the original capital. Cn the other hand, companies that have rate of return smaller than their cost of capital

sell with discount compared to the original capital invested in company. Thus whether a company has positive or negativeM< depends on the level of rate of return compared to the cost of capital.


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,inancial &easre line &anagers nderstand-!< has the advantage of being conceptually simple and

easy to e%plain to non0financial managers, since it starts with familiar operating profits and simply deducts acharge for the capital invested in the company as a whole, in a business unit, or even in a single plant, office or

assembly line.

Ending the confsion of &ltile goals-Most companies use a numbing array of measures to e%press

financial goals and obectives. #trategic plans often are based on growth in revenues or mar$et share.ompanies may evaluate individual products or lines of business on the basis of gross margins or cash flow.

'usiness units may be evaluated in terms of return on assets or against a budgeted profit level. Binancedepartments usually analye capital investments in terms of net present value, but weigh prospective

ac*uisitions against the li$ely contribution to earnings growth. !< is the only financial management system

that provides a common language for employees across all operating and staff functions and allows allmanagement decisions to be modeled, monitored, communicated and compensated in a single and consistentway 0 always in terms of the value added to shareholder investment.

Pitfalls of E2A

!< is a value based measure, and it gives in valuations e%actly same the answer as discounted cash flow, the periodic!< values still have some accounting distortions because !< is after all an accounting0based concept, suffering fromthe same problems of accounting rate of returns (/CI etc.). In other words the historical asset values that distort /CI dodistort !< values also. !< is the e%cess of /CI over +


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* Contributed by -Manish Daga,

II Year, Xavier Institute of Management,Bhubaneswar.

"P'E Ratio 6nlgged"

0 by 4arit #hroff : #uneet 9al #ingh G

If you are thin$ing about stoc$s you are thin$ing about 9E! ratio. This is one of the mostcommonly used valuation multiples in the stoc$ mar$et community.


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helps to gain the advantages of Trading on !*uity. 4owever unreasonable amountsof debt can lead to fiscal distress. Thus companies with high debt in their capitalstructure are loo$ed down by the mar$ets and generally trade at low 9E!?s.

#eneral Market 7rends-This is another significant factor that affects the 9E! of a

stoc$. In the short run the mar$ets are generally irrational in valuing a company.There are certain sectors that find favour with the mar$ets. Bor e%ample in the

software boom tech stoc$s commanded e%ceedingly high 9E!?s. The pharma stoc$swere in vogue some time bac$ and then it was 'io tech... some sector is in generalfancied by the mar$et.

Interest Rates-The level of interest rates in an economy has a big effect on the price

earning multiple of stoc$s. +ith a fall in the level of interest rates the fi%ed incomemar$et becomes unattractive because of low interest and hence money is diverted tothe stoc$ mar$ets.


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structure of a ollateralied =oan Cbligation (=C) G, a typical securitiationtransaction.

Figure 1: Sample CLO structure

In the above =C transaction, the originator pac$ages a pool of loans andassigns his interest therein, including the underlying security, to aban$ruptcy remote : ta% neutral entity which, in turn, issues securities toinvestors. The idea of such an e%ercise is to completely transfer the interest

in pool of loans to the investors (a "true sale") and achieve a rating higherthan that of the Criginator GG.

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* C12s are seurities ba/ed or oaterai+ed by a diversified ortfoio of seured or unseured oansmade to a variety of ororate ommeria and industria oan ustomers of one or more endingban/s.** )trutured rating anaytia riteria fous on how muh redit enhanement is needed to ahievesuh a rating, and aomanying ega riteria fous on isoation of the assets from the redit ris/ ofthe seer.

+ith the help of securitiation transaction, an originator can transfer the credit and other ris$sassociated with the pool of assets securitied. #ecuritiation can provide much needed li*uidity to

an CriginatorNs balance sheetK help the originator churn its portfolio and ma$e room for freshasset creationK obtain better pricing than through a debt0financing routeK and help the originator inproactively managing its asset portfolio. #ecuritiation allows investors to improve their yieldswhile $eeping intact or even improving the *uality of investment.

)ecriti5ation in India
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In the Indian conte%t, there has been moderate amount of activity on the


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small 4Bs with good origination capabilities and limited balance sheet strength in stayingprofitable and concentrate on the housing loan origination. The most important roadbloc$s forM'# in India are lac$ of mortgage foreclosure norms and the high incidence of stamp duty forassignment of mortgage necessary for securitiation.

Collaterali5ed De$t O$ligations .CDO! CO! CBO0

In this era of ban$ consolidations, DCs can help ban$s to proactively manage their portfolio.DCs can also help ban$s in restructuring their stressed assets. III made an aborted attemptto do a 'C issuance in


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#tamp Duty is a state subect in India. #tamp Duties on transfer of assets in securitiation canoften ma$e a transaction unviable. +hile five Indian states have recognied the special nature ofsecuritiation transactions and have reduced the stamp duties for them, other states still operateat stamp duties as high as 1-7 for transfer of secured receivables. The +or$ing 8roup of /'Ihas recommended a uniform rate of -.17 duty on all transactions. The acceptance of theserecommendations by other states can boost the securitiation activity in India especially in theM'# area.

d& 0a9ation ; 8ounting


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0 by 9ina$ /udra 'hattacharyya G

The true measure of the performance of a firm is the value created by a f irmover a period of time. 4owever the value of a firm largely depends on thevalue of beta which denotes the ris$iness of the stoc$ of a firm vis0R0vismar$et. 4owever a firm is largely prone to unsystematic ris$ which tends to

affect individual firms over a large period of time. Cver a long period the firmis however able to brea$ free from the shac$les of such unsystematic ris$.'ut it must be admitted that the firm continues to suffer from mar$et ris$which affects the entire mar$et portfolio. !ven MM proposition I and IIstrongly depend on proper valuation of beta particularly in determining thevalue of an all e*uity firm. MM proposition measures value of firm in a worldof corporate ta%es as

'ut the *uestion that arises is how should beta measured to determine theactual ris$iness of a stoc$L

Cne approach usually ta$en is the stoc$ mar$et approach wherein beta ista$en as the sensitivity of stoc$ movement to mar$et inde%es beta ismeasured asF

'eta H C (i, m)Eariance (m)+here I H ith stoc$ and m H mar$et movement.

It must be admitted that this method is perhaps one of the easiest to put intoaction. 4owever this method ta$es a myopic view of beta as it considersonly the past performance of an individual firm vis0R0vis the mar$et.Moreover unsystematic ris$ is inherent in these methods of beta or firmanalysis.

Therefore, the *uestion that must plague any researcher is what is thedefinite approach to go forwardL 9erhaps the best measure in suchcircumstances is the valuation of beta using the bottom up approach whichwill help to not only to overcome the unsystematic ris$ but will also help tohave stable beta ta$ing into account the perspective of the entire industry.This can be accomplished in a simple five stage processF

1. =oo$ for comparable firms in the same industry. 9referably the firmsshould be belonging to the same *uartile in the industry.omparable parameters may be sales, profits, installed capacity etc.

6. ompute the historical beta using stoc$ mar$et inde% and relevantstoc$ movement of comparable firms. This will give us 'eta e*uity

;. &nlever the beta using the formulaF

This will give us 'eta


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above. This will give us a stable industry 'eta


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0 by idhi #harma G

Page 3 :

#everal hundred years ago, man$ind, through the creation of money, beganto accumulate capital to build productive facilities that no one person could

afford. This was the beginning of the need for the stoc$ mar$et. Investorsneeded a way to sell their investments as their circumstances changed.

Brom an original arrangement where investments were illi*uid, wenow have very li*uid mar$ets where investments can be bought and

sold with relative ease and with a fairly low cost of transaction.

Cver the last two decades, the common investor has discovered new arenasof investment. The liberaliation and opening up of economy has openednew doors to the proverbial treasure, apart from the regular orthodo% modes.Most of the investors loo$ for best returns from their investment barringthose orthodo% lots who avoid ris$s. There is a plethora of opportunitiesavailable to par$ surplus funds, the most interesting and the most volatile

being the stoc$ mar$et.

To invest successfully over a lifetime in the stoc$ mar$et does not re*uireany unusual business insights or inside information. +hat is re*uired is faithin your investment decision and the patience to watch the stoc$ grow. If alayman follows the general rules to investing, he would be able to ma$ehandsome profits over a period of time. In order to beat the averages, whatis re*uired is an understanding of what we call in financial terminology, !0#0, i.e., !conomy0#ector0ompany


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promising companies in these industries.


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The second important criteria is Earnings Per )hare .EP)0. !9# is nothing but the earnings of acompany over a year divided by the total number of shares outstanding. The higher the !9#, thewider is the grin on an investors face.

The third is Price'E1ity Ratio .P'E0. !9# alone means absolutely nothing. In order toget a sense of how e%pensive or cheap a stoc$ is, investors loo$ at earnings relative to

the stoc$ price. To do this, most investors employ the priceEearnings (9E!) ratio. The 9E! ratiota$es the stoc$ price and divides it by the !9#. This 9E! ratio is then compared to the 9E!s ofother companies in the same sector to get an idea of how the company is valued as opposed toits peers.


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Effect of #lo$ali5ation on Asian Markets .India! =ong >ong! ?aan0( the Diary of Recent Indian )tock )l&

0 by iswanath 8. >.


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,igre ;- D?IA ( )ense+ Change )ince ast / Months

,igre /- )tock Indices of ?aan! M&$ai! =ong >ong ( 6) )ince ast / Months

Page 3 /

8enerally,


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Its evident that globaliation has interlin$ed countries to such an e%tent that any change inthe maor stoc$ mar$et will reflect changes in the others too. Trade and capital flows have

increased to enormous volumes.


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Is Mergers and Ac1isitions a #rowth )trategy

0 by /avi >umar G

Page 3 :

ompanies that do not pay attention to the $ey issues often find a merger orac*uisition to be an e%pensive failure.

Merger of two companies is li$e, a male (ompany


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mar$et ratings. They are confident that they will derive significant value from these companies inthe upcoming years.

These ac*uisitions were meant to build certain geographical footprint, particularly in!urope. Through ac*uisitions, +ipro is also loo$ing at building domain e%pertise,

ac*uiring intellectual property and patents, and basically strengthening its consultancy s$ills.


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Desite the growing resence of hedge fnds in the world! financial and invest&entcircles hedge fnds are still enveloed in a veil of &ystery9 7his article discsses the$asic hedge fnd strctre! and also reviews their resent state in I8DIA! and the variosreglations that they are s$%ected to9

Introdction

< hedge fund can be defined as an investment structure that manages a private unregistered pooland compensates the fund manager with an incentive0based fee based on a percentage of theprofits earned by the fund.

4edge funds, in general, are not registered. They have avoided registration by limiting thenumber of investors and re*uiring that their investors meet an income or a net worth standard.Burthermore, hedge funds are also prohibited from soliciting or advertising to the generalaudience. The primary aim of most hedge funds is to reduce volatility and ris$ while attempting topreserve capital, and deliver positive returns under all mar$et conditions.

=ow 7hey 4ork

To achieve pre0set returns target, these funds do not restrict themselves to their country of originand operate on a global scale. 4edge fund managers typically see$ absolute positive investmentperformance. This means that, the hedge funds target a specific range of performance, andattempt to produce targeted returns irrespective of the stoc$ mar$et trends. This is in contrast toinvestments by mutual funds, where success or failure is often measured in terms of performancein relation to a stoc$ inde%, li$e the #ense% or ifty.

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The hedge fund structure helps the investor turn mar$et opportunities into investment returns.The investor brings funds to the industry, these funds are pooled in investment structures calledhedge funds, and this structure gives the investor access to hedge fund managers who provideinvestment e%pertise and use alternative investment strategies.
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Bor investors, this structure 0

helps pool assets with those of other investors

is a way to access talented hedge fund managers

is a method to access the alternative investment strategies used by the manager

Only for =eavy3weights .7he Invest&ent )i5e0

4edge funds specifically target high net worth investors with huge investible corpus. Most ofthese funds limit the number of investors by setting a high minimum investment. The minimuminvestment sie for hedge funds ranges from 1--,--- to 1- million. 4uge inflows are re*uiredbecause of the ris$s and the type of instruments they deal in.


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=i*uidity here means the time periods for which investors may redeem their investments andhave their money returned from the fund.

Most of the hedge funds suffer from low li*uidity. &sually, hedge funds open their ?redemptionwindow? two to four times a year, for a few days.

The investors also have to ta$e into account the notice period that they are re*uired to observebefore they redeem their investment. Bor e%ample, if the fund allows the investor a redemption atthe end of each *uarter and a ;- day notice, an investor wishing to redeem on #eptember ;-must notify the fund by


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Burthermore, in order to match the very high returns generated by these funds, some of theinstitutional players may adopt a high ris$0high reward strategy without having ade*uate e%pertiseas compared to hedge funds.

Due to globaliation and economic liberaliation, many developing countries have e%periencedfinancial turbulence caused by the operations of hedge funds. In India, a common opinion is that

these mar$et players might bring in too much volatility in the mar$et.

To prevent such a situation, #!'I has penned down certain rules regarding the operation ofhedge funds in IndiaF 0


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4edge funds cause steep dips in prices, whenever they e%it the mar$ets, sha$ing sentimentsbadly.


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The formal sector comprises of the ban$s such as


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percent of poor households are located in rural areas, total credit demand ranges between /s.6 billion and /s. -- billion. 4owever, only /s.1A billion of this amount has been generated sofar. The reason for this is that maor portion for rural crediting has been from the informal sectorand this is at a very high interest rate, thus reducing the volumes of such credits, and by far hasbeen for investment purposes (1;7) and more for family emergencies (627) and sociale%penditures (127).

There are a number of factors why rural crediting by the formal sector has not ta$en pace so far.

=igh fiscal deficitshave meant that 8overnment is appropriating a large share of financialsavings for itself.

Persisting interest raterestrictions reduce the attractiveness of lending, particularly to small,rural clients.

Cn the other hand, informal credits have been attractive albeit high interest rates due toF

Ble%ible repayment options

onvenience and fre*uency with which such loans can be accessed

=ess reliance on collateral (only [email protected] of households report providing collateral against theloan)

Meeting the De&ands

Inade*uacies in rural access to formal finance and the seemingly e%tortionary terms of informalfinance for the poor provide a strong need and ample space for innovative approaches to servethe financial needs of IndiaNs rural poor. < gap of as high as A702-7 in supply and demandcannot be closed by only the e%isting MBIs because many, particularly the younger and smallerorganiations, lac$ the institutional capacity to e%pand.

>ey Concerns


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Inclsiveness and co&etition in the &icrofinance sectorcan generate high payoff. This willnot only give the borrower a no of options for raising debt, but also drive the costs down to raisethem.

Proven I&act of Micro3financing

The effects of micro0financing tric$ling down to the poorest of Indians can already be observed inthe Indian economy.

I&rove&ent in Asset Position

The average increase in assets was about 367, from /s@,A; to /s11,32; in real terms (in oneto three years) in most of the households where micro0financing has been e%tended. 'efore giventhe credit, one in three households had no assetsK after that, it changed to one in si%.

Increase in )avings

+hile most households given micro0credits were having negligible or no savings, this improved to/s. 1@-0/s. @- and in some cases, the average household savings rose to as high as /s. 1.

Changes in Borrowing Patterns

+ith improvement in above two factors, people were more ready to borrow from the semi0formaland formal sector rather than their traditional creditors i.e. friends and family, moneylenders,landlords.

I&act on inco&e

The average net income per household increased from /s 6-133 to /s. 6@AA2.

ooking Ahead

+hat will it ta$e for micro credit to become a mainstream mode for lendingL Cne option is toprovide other financial services similarly built around small

amounts of money, such as micro insurance. There is tremendous scope to design well0adapted insurance products for the poor in the insurance sector as well. < number of

initiatives that should be ta$en in this area as F

Mothering of Develo&ent Innovations

The institution aims to promote and nurture new ideas on different development themes, whichhave larger potential to address the livelihoods and development of the poor in a region vi.,

microfinance, small scale irrigation, dry land agriculture, IT for poor, wor$ing with panchayats.

Pro&oting Instittions to reach )cale

!%clusive thematic organiations will be promoted to underta$e development wor$ with a sub0sectoral focus. The primary role of the institutions is promotional and to ensure that benefits reacha large number of poor with *uality.

=&an Resorce Develo&ent


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The institution would bring young professionals into the development sector and provide them anopportunity to practice and develop relevant $nowledge, attitudes and s$ills to wor$ long term inthe development sector.

#elf help groups today handle /s.@-- crores of disbursement. Cver a *uarter of poor Indianhouseholds will by 6--2 li$ely have access to formal financial services if current trends continue.

4ence, with proper regulation and a maor thrust given by the govt to provide a suitableenvironment for micro0financing, it would certainly bring out the most optimum results inalleviating poverty from the country and allowing the poorest on Indian in oining the bandwagonof prosperity and growth, that India is poised to achieve in the years to come.

Conclded9

Contributed by: -

Varun Ahuja,

,II Inflows 3 Is It Really =ot Money

0 by #ubhasree ha$raborty :


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after the general election in India when the sudden reversal of BII flowstriggered a panic reaction, which resulted in very high volatility in the Indianstoc$ mar$et. During this period, the #ense% e%perienced its worst single0day decline in its history and in the three0month period between


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#hort0term controls can help economies cope with the downside of BII flows.

=ong0term, the best armour is to strengthen domestic financial systems, only then cancountries benefit from BII inflow without falling victim to its costs.


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6. Mutual Bunds

;. Investment Trust

. Insurance or reinsurance companies

. !ndowment Bunds

@. &niversity Bunds

3. Boundations or haritable Trusts or haritable #ocieties who propose to invest on theirown behalf, anda.


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,II Inflows- Really =ot Money

BII inflows are popularly described as "hot money", because of the herding behaviour andpotential for large capital outflows. 4erding behavior, with all the BIIs trying to either only buy oronly sell at the same time, particularly at times of mar$et stress, can be rational. +ithperformance0related fees for fund managers, and performance udged on the basis of how otherfunds are doing, there is great incentive to suffer the conse*uences of being wrong wheneveryone is wrong, rather than ta$ing the ris$ of being wrong when some others are right. alueat /is$ models followed by BIIs may destabilie mar$ets by leading to simultaneous sale byvarious BIIs.

Boreign funds have invested /s @2,2 crore (13.; billion) in Indian mar$ets in the last nineyears. This is almost 1- per cent of the total mar$et capitaliation of around /s 3,6-,--- crore.Though this is not a big amount, if BIIs pull out this money suddenly, it can create a maorcollapse of the mar$et. Bor e%ample, Boreign institutional investors (BIIs) pumped around /s3,1-- crore (over 1. billion) into the Indian mar$ets (e*uity and debt) in May and Oune of 6--;.

8e+t

Due to this huge inflow of BIIs, the #ense% vaulted by over 3-- points (nearly 6 per cent) to;,@66.; in those two months. The massive inflow had ta$en the net BII inflow in the first si%

months of 6--; beyond the /s 1-,---0crore mar$ to /s 1-,@ crore. Most of these funds werebrought in by hedge funds, which were not directly registered with mar$et regulator #ebi.


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7he figre $elow shows the relation $etween the &ove&ent of sense+ and net ,IIinvest&ent in India in the &entioned eriod9

Though the volume of trades done by BIIs is not very high as compared to other mar$etparticipants, they are the driving force in determination of mar$et sentiments and price trends.

This is so because they do only delivery0based trades and they are perceived to be infallible intheir assessment of the mar$et.

Average shareholding attern of )ense+ Co&anies! ?ne ;


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7he figre $elow shows the &ove&ent of the )ense+ and certain key events whichossi$ly led to an swing or downswing in the )ense+9

Brom this we can conclude that there are various factors that govern the volatility in #ense% andBII outflow is not the only deciding parameter for the same.

Conclsion

+hy did India survive unscathed in 1223 during the #outh !ast


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phenomenally large last yearK their share in mar$et turnover is actually down to 117 from a highof 67.

dividend policy and its effect on market pricing

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